On April 5, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) announced the first monetary award under the Dodd-Frank safe harbor provisions, awarding more than $2.2 million to a whistleblower who first reported to another federal agency before providing the same information to the SEC.
The Dodd-Frank Act provides that individuals who report information about possible securities violations to the Commission are entitled to a potential award of between 10 and 30 percent of any sanctions that may be levied by the Commission in connection with an enforcement action that results in more than $1,000,000 in penalties. § 240.21F-3. In order to qualify for an award under this “whistleblower provision” the would-be whistleblower must be the source of original information to the Commission. § 240.21F-2. An exception to this requirement is found in the so-called “safe harbor” provision (21F-4(b)(7)), which permits individuals to qualify as whistleblowers for purposes of an award if they first report information about a potential violation of the securities laws to another agency identified in the Act, and within 120 days, report the same information to the Commission. 21F-4(b)(7). Agencies covered by the Act include Congress, any federal agency, a state Attorney General, and the Public Company Accounting Oversight Board.
In announcing the latest award under the whistleblower provisions, the SEC stated that it expressly relied on Dodd-Frank’s safe harbor provision, finding the information provided by the whistleblower to be “original information” despite that it was first provided to another agency. The SEC explained that the whistleblower reported to a qualifying agency that then referred the matter to the SEC, and, within 120 days, the whistleblower provided the same information to the Commission. The SEC deemed the information provided by the whistleblower to be original information despite that the Commission had already begun its own investigation on the referral from the first federal agency. In touting the award, Jane Norberg, chief of the SEC’s Office of the Whistleblower, said: “Whistleblowers, especially non-lawyers, may not always know where to report, or may report to multiple agencies. This award shows that whistleblowers can still receive an award if they first report to another agency, as long as they also report their information to the SEC within the 120-day safe harbor period and their information otherwise meets the eligibility criteria for an award.”
While it is alone noteworthy that the Commission has for the first time invoked the safe harbor provision, companies should reflect on the efforts of many companies during the rule-making process that ultimately resulted in the safe harbor provision. In response to the announcement of the Dodd-Frank whistleblower bounty provision, numerous companies and associations filed comments during the Commissions rule-making process for Exchange Act, Rule 21F, arguing that the bounty awards would incentivize employees to circumvent existing compliance programs and internal company reporting mechanisms, such as hotlines, in favor of directly reporting to the SEC, thereby depriving well-meaning companies of a necessary source of information to run an effective compliance program. Although the Commission rejected proposals that would first require whistleblowers to report internally through a company’s existing reporting procedure in order to qualify for an award, the SEC adopted the safe harbor provisions invoked in its Thursday award. In addition to allowing for an initial report to a separate qualifying agency, the safe harbor provisions provide that an individual may be eligible for an award if he or she first reports internally through a company’s compliance program (“to an entity’s internal whistleblower, legal, or compliance procedures”), but within 120 days, provide the same information to the SEC. 21F-4(b)(7). While the bounty incentive remains, the rules at least allow for a whistleblower to first report through internal legal and compliance channels and still later qualify as a whistleblower under the Act. Companies are advised to ensure that their compliance and legal reporting mechanisms are well-advertised so that would-be whistleblowers continue to come forward with potential concerns. To read more about this, view our blog post here. In addition, even with well-publicized reporting procedures, given that the safe harbor provision only provides 120 days for a whistleblower to come forward to the SEC after making an internal report, companies should ensure that they have clear investigation procedures in place that will allow a company to efficiently assess the nature of a complaint, effectively investigate the same, and respond to any whistleblower who might otherwise take his or her concerns directly to the Commission.